Germany approves law on bank nationalization: Economy

EconomyGermany approves law on bank nationalization

The new law leaves open the possibility of an expropriation of Hypo's shareholders as a last resort. (Photomontage of the HRE headquarter)

Quelle: picture-alliance

The German cabinet approved a law on Wednesday letting it nationalise banks, setting aside a reluctance to seize private property in the latest government intervention worldwide to tackle the financial crisis. The bill could lead to the forced nationalisation of struggling German lender Hypo Real Estate.

In setting aside a postwar commitment to respect private property, Germany became the latest government to edge away from free market policies, instead using state support to prop up flagging banks and industries.

WHAT IS THE GOAL OF THE NEW LEGISLATION?

The draft legislation, an extension of Germany's existing bank rescue law, was formulated to allow the government to take control of Munich-based lender Hypo Real Estate, a high-profile casualty of the financial crisis. Hypo has received a total of 102 billion euros ($129 billion) in guarantees from the state and fellow banks but its financial condition remains uncertain. Because of its key role in the 800 billion euro Pfandbrief covered bond market, the government has said it cannot be allowed to fail.

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WHY DOES BERLIN NEED A LAW TO NATIONALISE A BANK?

Germany's „Basic Law“, or constitution, forbids the expropriation of shareholders without the establishment of a new law. In the case of Hypo Real Estate, the government wants the option of expropriation because without it, it might have trouble taking full control of the bank. This is because U.S. private equity investor JC Flowers owns nearly a quarter of Hypo's shares.

WILL BERLIN EXPROPRIATE JC FLOWERS SHARES?

Berlin is keen to avoid this step, in part because expropriation, or „Enteignung“ in German, is a step associated in the minds of many Germans to the Nazis seizure of Jewish assets in the 1930s and the assault of private business owners by the former communist government of East Germany.

The government will continue to try to negotiate a settlement with JC Flowers and if that fails, it could seek to gain control by pushing through a capital increase at a Hypo shareholders meeting. The new legislation makes this possible by reducing the shareholding majority needed to inject fresh capital to 50 percent plus one share from a previous threshold of 75 percent plus one share.

COULD OTHER BANKS BE NATIONALISED?

The German government has made clear that it wants to avoid taking control of its banks and would only do so if it deemed the broader financial system to be at risk.

The draft law imposes strict limits on any expropriation of shareholders, making clear that this would have to occur by Oct. 31, 2009 and that any cabinet decree ordering this would have to be submitted by the end of June. This aims to limit application of the expropriation option to Hypo Real Estate alone.

Germany has said no other banks are in the same difficult position as Hypo Real Estate, but if the financial crisis worsens, other German financial institutions could come under pressure and force the government to intervene.

Last month the government took a 25 percent stake in Commerzbank, which on Wednesday reported an operating loss of 822 million euros for the fourth quarter.

President Barack Obama on Tuesday signed into law a $787 billion package of spending and tax cuts, the biggest initiative of its kind in U.S. history. He said the stimulus package would "mark the beginning of the end“ of the ills facing the economy.

But with new problems emerging all the time from a twin collapse in asset prices and availability of credit, financial markets remained jittery about the outlook.

"The problem is that we don’t have any clear answers from the Obama government regarding the banking rescue package,“ said Thierry Lacraz, strategist at Pictet in Geneva.

"Until we have more visibility on the U.S. banks and more positive wording from companies, it’s difficult to see markets climbing again.“

U.S. automakers General Motors Corp and Chrysler LLC are also seeking almost $22 billion in extra government aid on top of the $17.4 billion already received.

But analysts say the U.S. auto makers may not be able to return to profitability without first going through bankruptcy reorganisation that would likely mean plant closures and tens of thousands of job losses. If this were to happen, it would be a "messy and lengthy process which would further undermine confidence in the fragile economy“, said Michael Sheldon of Connecticut’s RDM Financial.

GM said it could run out of cash as early as next month and its shares fell 12.8 percent on Tuesday. Chrysler said it sees the downturn in the U.S. car market lasting another three years.

Governments worldwide are struggling to find their own solutions to the financial crisis, while trying to avoid accusations of protectionism and state intervention that could slow global trade or undermine confidence in their economies.

Germany’s cabinet approved a draft law paving the way for the government to take control of Hypo Real Estate which has received billions of euros in state guarantees.

The law leaves open the possibility of an expropriation of Hypo’s shareholders as a last resort.

Other countries, including Britain and Ireland, have already seized control of banks, justifying this by pointing to the nature of the crisis and the need to protect taxpayers.

But Germany has agonised over "Enteignung“ (expropriation) of shareholders, a loaded term linked in the minds of many to Nazi seizures of Jewish property in the 1930s and East Germany’s assault on private business after World War Two.

LITTLE REPRIEVE FOR MARKETS

Government actions so far have failed to reassure financial markets. Global share prices, as measured by MSCI’s world equity index, were down on Wednesday reflecting hefty falls in Asia overnight.

The euro edged up against the dollar after hitting a 2-1/2 month low on Tuesday on concerns about euro zone banks with heavy exposure to weakening economies in Central Europe.

Overall, investors were still heading into safe assets such as gold as worries spread the recession could drag down economies which had so far resisted the worst of the crisis.

In China -- which many had hoped might be able to power the global economy out of the worst downturn since the Great Depression -- a trade union official warned against "hostile forces“ stirring up trouble amongst its newly employed workers.

Beijing’s Communist Party leadership has said legions of idle rural workers gathered in the country’s struggling export hubs could pose a threat to the stability.

About 20 million jobs have been lost in southern China’s manufacturing hub of Guangdong alone.

Sun Chunlan, vice-chairman of the state-backed All-China Federation of Trade Unions, said police had been rushed to all regions to "understand the situation with regional social stability“.

Beijing said it would increasingly use its $2 trillion in foreign exchange to support domestic growth and finance the expansion of Chinese companies overseas.

But it denied a magazine report quoting a senior official as saying its slowing economy meant the yuan might weaken to as low as 6.95 to 7 per dollar.

The news across Asia has been almost uniformly bad with Japan, the world’s second-largest economy, reeling from its worst downturn in a generation.

In Taiwan, a source close to the government said GDP fell 8.36 percent in the fourth quarter of 2008.

The rare exception was in Australia where retail sales data showed a rise of 0.8 percent in the fourth quarter as shoppers took advantage of stimulus measures and falling interest rates.

A 787 billion US dollar stimulus plan was passed by the United States Congress on Friday, a package which gave rise to discussion among G7 chiefs in Rome concerning protectionism, largely due to a "buy American" clause in the document. Meanwhile the recession in the Eurozone was deepening, with dismal reports from Italy, Germany and France.

Chancellor Angela Merkel’s government appears ready to end weeks of intense debate and back a new law which would give Berlin the right to seize private property for the first time in the postwar era. The law, an extension of bank rescue legislation agreed last year, is due to go before the cabinet and would set the stage for a nationalisation of Hypo Real Estate.

Frank Walter Steinmeier, Germany's Foreign Minister and SPD candidate for Chancellor in this year's Federal election, arrived in Baghdad Tuesday for an official visit. His visit is said to signify a shift in European engagement in Iraq with new U.S. President Obama in the White House and plans to withdraw U.S. troops from Iraq by the end of 2011.